WilliamL. Watts

SAN FRANCISCO (MarketWatch) — Natural-gas futures dropped by nearly 7% on Monday, falling prey to apparent profit taking after tapping levels not seen since 2010 in the wake of a fresh U.S. cold snap and solid underlying demand for the heating fuel.

February natural gas
US:NGG14
lost 33.5 cents, or 6.5%, to settle at $4.847 per million British thermal units on the New York Mercantile Exchange, after earlier spiking past $5.40 in electronic trading. That price marked the highest level since February 2010, according to FactSet data tracking the closing levels for most-active contracts. On Friday, prices settled at their highest since June 2010.

March natural gas
US:NGH14
which is among the most-active contracts, closed down 32 cents, or 6.5%, at $4.674 per million Btus.

“What is really interesting today in energy is the big spike in natural gas up toward $5.45 and the drop back under $5,” said Colin Cieszynski, senior market analyst at CMC Markets. “This big bearish reversal looks like a buying climax or bull trap peak.”

“This week’s inventories will likely have a big drawdown from the cold last week, but today’s reversal suggests that natgas may have moved up too far too fast and we could see a correction once the cold weather breaks,” he said in emailed comments.

Options on the February contract expired at the close on Monday. February futures contracts go off the board on Wednesday.

Given the expirations this week, the bout of profit taking in natural gas wasn’t a surprise, said Phil Flynn, senior market analyst at Price Futures Group.

The $5.40 level was a widely held technical target and the expectation is that $5.40 was pretty much priced in the cold temperatures we’ve been anticipating,” he said.

A major winter storm hit much of the Northeastern U.S. last week, sending temperatures below freezing and causing inventories for natural gas to fall. The U.S. Energy Information Administration reported Thursday that natural-gas supplies dropped 107 billion cubic feet for the week ended Jan. 17.

A forecaster at the U.S. National Weather Service last week suggested that the cold-weather now covering much of the country would stay for at least another week. AccuWeather.com said Monday that a blast of frigid air will hit most of the eastern two-thirds of the U.S. through Wednesday, possibly yielding the lowest temperatures so far this winter in some communities.

Natural-gas prices are likely to remain elevated for at least the first quarter of this year as the cold weather continues to temporarily boost demand, said Tom Pugh, commodities economist at Capital Economics, said in a note Monday, then as more normal temperatures return, demand and prices are likely to fall back to $4.

Looking further out, however, he sees the price of natural gas beginning to rise again in 2015.

Nymex oil falls further

Meanwhile, March crude
US:CLH4
fell by 92 cents, or 1%, to close at $95.72 a barrel on Nymex. Oil prices fell 0.7% on Friday, but rose 2.4% last week.

Analysts at Bank of America Merrill Lynch said they hold a “moderately negative stance on global oil” this year as the market moves “from being relatively balanced to slightly oversupplied.”

U.S. crude-oil markets will likely remain oversupplied next year, they said. As previously noted, they forecast an average West Texas Intermediate oil price of $92 a barrel for 2014. They also said they see a risk of $50 WTI in the next 12 to 24 months.

Prices for Brent crude, the European benchmark, sold off strongly to start the week as “ongoing concerns about the global economy manifest themselves in a sell-off in emerging markets,” said Matt Smith, author of energy and financial-market newsletter The Daily Distillation.

March Brent crude oil
LCOH4, -0.03%
dropped $1.19 , or 1.1%, to $106.69 a barrel on the ICE Futures exchange.

“Brent’s focus is more on slowing oil demand from the engine room of global growth, while U.S.-based [West Texas Intermediate] is more focused on domestic issues, such as an unclogging of the supply glut at Cushing, [Okla.] as the Southern leg of the Keystone pipeline gets up and running,” said Smith.

Platts reported Monday that China’s apparent oil demand in December fell 1.9% to an average of 10.11 million barrels per day compared to the same time a year ago. December marked the second-straight month that China’s apparent oil demand contracted. For 2013, China’s apparent oil demand rose 2.5% versus the prior year to 9.83 million barrels per day.

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